Wednesday, November 14, 2007

Oil detours from road up to $100

By Wailin Wong (Chicago Tribune)

Consumers feared it, speculators rooted for it, and markets waited anxiously for its arrival. But this week, the specter of $100-a-barrel oil appears to have receded.

On Tuesday, the December contract for light, sweet crude oil on the New York Mercantile Exchange fell $3.45, to $91.17 a barrel, backing further away from the historic $100 level that it had threatened to breach last week.

The price of crude has surged since late August, hitting a string of record highs as the dollar dropped to historically low levels against other world currencies.

The main catalysts for oil's price decline Tuesday were a monthly report by the International Energy Agency, which lowered its forecast for fourth-quarter oil demand, and a hint from Saudi Arabian Oil Minister Ali Naimi that the Organization of the Petroleum Exporting Countries might discuss increasing production when it meets next month.

Traders also played a role, since oil's flirtation with $100 was driven not only by current events but also by the activity of speculators eager to seize on sky-high commodities prices.

"A key reason why prices have spurted so quickly to high levels was there were a lot of financial investors in the market," said Mark Zandi, chief economist at Moody's in West Chester, Pa. "There is a lot of options trading and other financial activity related to energy. That drove prices up, and that is now weighing on prices, at least temporarily."

In active and frothy financial markets, participants tend to become fixated on tidy benchmarks -- 14,000 points for the Dow Jones industrial average, for example. The magic number for oil was $100 a barrel, a level that was as tantalizing as it was hard to puncture.

Dave Kirsch, manager of the market intelligence service at consulting firm PFC Energy in Washington, described the attitude among many traders as, "It's never hit 100 before; wouldn't it be cool?"

Kirsch also said he believes the International Energy Agency had overestimated oil demand in its projections, which are crucial data for markets. The Paris-based agency revised its view on the fourth quarter on Tuesday, saying there are "strong indications that high prices are depressing demand" and reducing its projection for the period by 500,000 barrels a day, to 87.14 million barrels.

High prices may persist

But although oil prices have retreated from $100, they are likely to remain at elevated levels that will continue to nag at consumers. Economists note that unease over the U.S. economy, which is grappling with a battered housing sector and volatile financial markets, will persist whether crude is at $90 or $100.

The consequences of high oil prices are "a little more like termites as opposed to something more dramatic," said Carl Steidtmann, chief economist at Deloitte Research in New York. "It just slowly eats away at the foundation of consumer spending, and that will obviously continue to happen."

Steidtmann noted that high energy costs are helping push up the cost of food, while many consumers also are getting squeezed because of higher mortgage payments and less access to credit.

"Consumers have a lot on their plate right now," he said.

Gasoline prices have ticked upward but not at a pace that mirrors the meteoric ascent in oil. Zandi estimates that each additional dollar in crude prices translates to a 4-cent increase at the pump. According to data from AAA and the Oil Price Information Service, the average national gasoline price on Tuesday was $3.105 a gallon, up from $2.761 a month ago. The average price in Illinois is $3.185 a gallon, with Chicago at $3.208.

Gasoline use stable

Gasoline demand has remained relatively steady despite the price increases, with the onset of fall bringing an expected seasonal drop-off in consumption. Nicole Niemi, a spokeswoman for AAA in Illinois, said any lifestyle changes, such as trading in a sport-utility vehicle for a more fuel-efficient car, likely happened when gas prices topped $3 a gallon.

"It's not a rash, major change at the moment," Niemi said. "It will depend on how long prices stay at $3 and how far they continue to climb."

The crucial period will come in spring, when driving season begins and gasoline demand generally swings upward, pushing prices higher.

If the economy remains on shaky footing, elevated oil prices in the spring will be "difficult for consumers to overcome, given the severity of the housing downturn and a weakening job market and ups and downs of the stock market," Zandi said. "It's going to be very hard for the economy to overcome."

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